Episode 5 – Not just a number cruncher – Lea Dudum, CFO Elevation Advisory

In this episode:

Matt Widdoes 

Welcome to Growth at scale. I’m your host, Matt Widdoes. This is a podcast for leaders who want to bring sustainable, predictable, scalable growth to their businesses. Every episode, I sit down with world class growth experts across product, marketing, finance, operations, you name it. The hope is that these conversations will give you real actionable advice for building and sustaining company growth. Our guest today is Leah Dudem, chief financial officer at Elevation Advisory. We talk about how early stage startups can structure their finance departments, when an accountant might be able to fill in for a financial officer, and the strategic merits of part time or full time CFOs. Welcome to the Maven podcast. I’m your host and CEO of Maven.com, Matt Widows. And today we have Leah Dudum with us to talk about finance and its role in growth. Lea, welcome to the show. 

Lea Dudum 

Thanks, great to be here. 

Matt Widdoes 

Yeah, I’m excited to have you. Could you tell us who are you, where do you work, what do you do? 

Lea Dudum 

So, I am a financial advisor to early stage startups. I started my career in corporate finance and management consulting on the East Coast. I moved out west and fell in love with the startup culture. I worked in house before joining Atomic, which is a venture studio. And that’s really when I learned that you need this kind of lightweight finance help for early stage companies. I’ve since gone independent and I’ve helped over 15 startups. I mean, Rocksbox is a jewelry subscription box. Homebound is a construction startup, podcast production company, actually floss company. So really all across the board for different early stage companies generally seed to series B. 

Matt Widdoes 

I’d love to hear a little bit more about your days at Atomic VC. Maybe tell us a little bit about what is a venture studio? Generally atomic VC is in San Francisco, there’s Betaworks in New York, there’s Science, Inc. in Los Angeles. There’s PSL in Washington. There’s a model that’s been around for a long time. But what is a venture studio and how does that differ from, like, a venture capitalist? 

Lea Dudum 

Atomic is its own fund. So it has LPs just like a normal venture investment group, right? But unlike venture capital groups that seek out new ideas from companies already formed outside of their company, Atomic utilizes their funds to actually start up and fund their own ideas. So essentially, the partners sit in a room and think through all the problems of the world. They then use founders in residence, or also known as entrepreneurs in residence, to kind of kick start the idea and fund it. Eventually they take outside funding, but generally the first kind of round or two is exclusively in house. So the nice thing about this model is they also have kind of the services side, which is kind of what I ended up being in. I actually joined before they had the services group. So they were just like, we need a finance person for these companies. Can you just do it? And then they realized, like, wow, actually legal and HR and accounting and all of these kind of shared services, kind of cost driving departments really can be utilized from day one at all these companies. The benefit here is that you get so much pattern recognition across the company. I can be working with three companies at once. And I see by sitting in finance, I see all the functions. I work with product, I work with marketing, I work with sales. And I can say, hey, sales team at company. Sales team at Company B is dealing with this exact same problem you guys should talk and that you can actually share that information when you’re in the studio, whereas externally you may not want to share all your sweet secrets. 

Matt Widdoes 

A lot of the people that listen to this are founders or are senior leaders at early stage venture. Certainly for me, finance is kind of like this big amorphous thing that I don’t understand and I kind of don’t want to look at it. It’s the tax bill. It’s all these other things that are like and it’s not as sexy or as exciting as other areas of growth. I feel like, at least from my lens. What are the early stages look like when you think about finance? Because at least for me, I think of CFOs as being this CFO of PepsiCo or something major. It’s not CFO of know startup. How do you think about that? What are kind of the early challenges that you see? What’s kind of some of that pattern recognition that you pulled from Atomic? 

Lea Dudum 

Yeah, I think it kind of comes in like stages, right? The earliest early stage, like the base level stuff is bookkeeping or record keeping, accounting schedules, just getting your accurate financials. You can’t do anything without that if you’re starting to get money in or paying things out, which fundamentally you will be doing maybe not money in, but certainly money out when starting a business that I think is kind of the first layer of finance and that’s not necessarily, I think, CFO. It’s much more in the realm of accounting. But I find that having a finance person there can help translate kind of the business brain of a CEO or a CMO into accounting, which typically is a more functional, less communicative type of department. The next level from there is just getting some simple platforms on and that’s really where some accounting type functions can do it. But. Do you have bill.com? How are you paying payroll? How are you expensing things for your team? There are at this point for early stage startups, I think a pretty standard suite of solutions which you could Google and do it yourself or you could get a finance person to do it for you. So that’s kind of the next level. Then you get into the more interesting stuff, which is generally where I come in. Like let’s build a financial model and do variance analysis. That could be very simple. I mean, you can go to a number of big finance firms or big accounting firms and they’ll probably have a fractional CFO who has a templated model and can put in some of your information. I think that that is for some companies sufficient. But obviously if you want to get a little bit more in depth and think about true strategy so long term planning, pricing, product market fit, cap structure, that’s the true heart of the CFO world for me and where I think you get the most value out of a CFO. But you can’t really do that top level thing unless you have all the things above it. 

Matt Widdoes 

Take somebody who’s they’ve got money coming in, they’ve got money going out, they have a healthy balance sheet, they are profitable. What types of things should that founder be thinking about? Are we looking at predictive analytics? Are we trying to forecast and we’re budgeting for headcount? What are kind of some of the things that maybe founders aren’t thinking about that they should be? Or maybe to kind of ask that another way, what were maybe some of the similarities that you saw across these companies at early stage? Whether it was at Atomic or elsewhere? What’s kind of some of that common stuff that you’re coming in and saying maybe oh my gosh, you guys haven’t done this yet. Or hey, did you know that you might want to be thinking about these things? 

Lea Dudum 

In my role where I really bridge the kind of finance and strategy. Say there’s just a lot of similarities in how a company operates and where a company can massively fail. Number one, I would say, is hiring. I think hiring is always a massive challenge. Not just like finding the right people, but actually thinking when to hire that person, what’s the ROI on that? And can I afford it now? Should I hire a senior person or a junior person? What’s the right balance of that? So I think hiring and those decisions are really critical, and where a finance person can help is really kind of map out a hiring plan and show that this is how much it’s going to cost us. This is the type of stuff that they’re going to be working on, which is going to lead to X amount of revenue, so we can feel comfortable about making those hires now. Another piece is prioritization. So I think early on, you just see all of these blue sky ideas you have this founding team are really excited, so much opportunity, and it’s hard because you could just want to do everything and fail at all of it, potentially because you haven’t focused your team. And I see that a lot, actually. That’s probably one of the biggest things. And so I’m not saying to get to Google level or Amazon level, like OKRs and KPIs, but I think that setting goals and creating your North Star and your pillars is a really important exercise to then be able to say these are three projects and it sounds super lame that it’s three. I want it to be ten, but it’s going to be three. And this is like the goal or around those three and how everyone kind of rolls up to them. And then the last one is honestly setting realistic expectations. I think it’s very difficult without the data. So back to even just having a simple bookkeeper. Raising money takes time. Everything costs money and things add up. And so being able to feel a little grounded while you’re in that kind of blue sky super aspirational state of that early stage, to be able to say, we’re going to build a culture of accountability and make sure that we set realistic expectations for our runway and our goals. 

Matt Widdoes 

I found maybe earlier this year, through doing some exercises like that, based on the math, I was hiring too slowly. So it was actually the inverse of that, which was, what are you doing? You should be putting this to work. One, if you end up with money at the this is the other thing I’m like, if you’re profitable, then all of a sudden, come November, December, everything starts to look like 50% off. You don’t even care because you’re like, well, if it’s $100,000, I’d rather put and it’s overpriced. It should actually be 75. It’s better to get it now than later, because all that 100 is going to turn to 50 anyways. So yes, so the inverse can be true. Although I get that that’s from a unique and maybe a privileged space. 

Lea Dudum 

I think that’s very real. I mean, the value of being analytical and setting up priorities is you can say, like, wow, I recognize that hiring one salesperson or account exec can bring X more in revenue. So if we see that that’s working, why not hire 20 outside of the issues of just like, organizational challenges? Right. Or if I know that I’ve made certain product tests that can improve conversion on my site, why not invest in a product person who can really make those incremental changes? So I think that a budgeting exercise and strategic planning tends to have that negative lens of like, all right, the CFO is going to tell me I can’t do these things, I’m hiring too slowly. But to your point, it could actually be the opposite, which is we need to move faster, and these investments are better to be made now than later. 

Matt Widdoes 

When people are starting to think about pulling in. Either a fractional CFO or a full time CFO. How important is it for them to have kind of a similar background or have worked at other companies? It’s kind of all the same. I think I know the answer, but how important is that level? Because in marketing and stuff and product generally, you can kind of get by with people that are tangentially related or they just have general consumer experience. How does that play out in this role?

Lea Dudum 

 I guess if you want to play in the marketing world, I would equate it to saying, okay, well, I’m looking for a paid marketer, but they’ve only done Facebook and now you’re asking them to do affiliates. In principle it’s the same, but the way that you operate and how you’re going to do it is going to be different. So you want to make sure that they have that experience. In the finance world, if you hire a CFO who has been exclusively in Enterprise SaaS, for example, their organization is going to be like the type of work that they do is going to be very important on revenue recognition. Right. Because these are large deals that they need to think through. What’s the pricing model? What are the commission plans? Those are going to be kind of the core challenges. Whereas if you’re at a products company, you’re doing like inventory planning, it’s a very different ballgame. You’re thinking about your cost of sales, which includes freight and packaging. So if you hire a CFO and you’re a products company and they’ve never worked in products, you have an issue because they could probably figure it out at the end of the day, if they have decent modeling skills and they are strategic and smart, they could certainly figure it out. But you probably want someone who context on how much should packaging cost as a percent of sales and what’s the relationship between a three PL and in house fulfillment? And so I think that there are these unique dynamics. Not every company is the same. And you probably want to have a CFO who’s at least worked in your world a little bit. 

Matt Widdoes 

That makes sense. And from a timing standpoint, when does it start? Like what conditions would be true for a CEO or founder to start to identify, hey, I think we’re starting to approach the time where we should have a full time CFO. When does that typically start to make sense? 

Lea Dudum 

Typically I would say around a Series B is when that happens. It course differs between company to company and if you’re lucky enough to be bootstrapped then you don’t have that milestone. Necessarily. What I think defines that is team size for one. So the bigger you get, the more complicated your org is. So at a series B you might be having enough transactions where it doesn’t make sense to have an outsourced accounting firm. So suddenly you’re hiring accountants in house and then maybe you’re going to hire a controller. So now you have a part time CFO hiring like managing full time people, which is doable to an extent. But what you have to think about is a part time CFO is going to be paid at a more expensive rate than a general full time CFO. So do you really want all of their hours in meetings managing people? Is that what you’ve hired them for? And if the answer is yes because you think that they’re a fantastic leader, then great. But otherwise, if you feel like you really need a manager and all of a sudden you’ve got a lot of people in house and a lot more structure, then you probably need to just hire that full time CFO so they can do the stuff that’s not super high impact, but necessary. 

Matt Widdoes 

I’m assuming. Not unlike the bookkeeper, you realize after having them, how valuable it was and maybe what you were missing in many cases. What are the kind of core challenges you’re trying to solve for clients generally? And do you ever have, like, are there many opportunities for automation or outsourcing? Is it all still kind of pencil and paper, essentially, or Excel spreadsheets? What are kind of those common things? And you’ve mentioned a few of them already, but I’m curious to kind of dig in there a little bit further. 

Lea Dudum 

I mean, my pitch to clients essentially is that stakes finance stuff, which is setting up your processes and systems, like getting you on QuickBooks, getting you on bill.com, managing an operating model, that’s going to be the first thing you’re going to want a part time CFO or CFO doing, managing your accountants, essentially. Even if you have a finance background and you’re amazing at it, a CEO should not be focused on that. So just take it all off of that plate and just make sure that everything is running smoothly and you have accurate financials. I think that that’s table stakes. The more interesting stuff is go to market strategy, growth strategy, pricing, hiring, operational efficiency, cost reduction. That’s all the stuff that the CFO really adds value. And so my day to day is not actually in the financial model. I am meeting with the marketing team, the sales team, the Ops team, to really understand how things are working. Where can we optimize? Are they focused on the right things? Do we have the right people in place? And then that’s where I roll all of those departments up and have a better picture of where the company is going so I can share the executive team. 

Matt Widdoes 

So that almost sounds like an operations role, right? I mean, where do those lines start to blur a little bit? How do you kind of separate those two? Where do they blur? When are they different? 

Lea Dudum 

They do blend. They do blend. Coming from management consulting, I always thought that I would go into COO, and I think it’s a fantastic role, and I’ve loved working with COOs in the past. Why I found myself with the F in my title instead of an O in my title, is that fundamentally, I believe that strategy needs to be rooted in your numbers, in your runway, in your burn. And so without that information, it’s kind of hard to operate strategy, particularly in early stage companies. It’s a very different picture if you’re you’re sitting on 300 million in the bank, right, if you’re trying to be profitable or if you have 18 months of runway, the finance person is extremely critical. And so a COO might be focused more on process and communication and efficiency within those orgs. The finance person is taking those learnings and putting them into numbers. So it’s essentially storytelling in numbers.

Matt Widdoes 

For people who are early stage. Kind of let’s define that as they’ve raised 10 million, 20 million maybe, but they’re kind of in that middle ground where let’s say they’re a founder or they’re part of the leadership team, they’ve recently come into some new money, they’ve shown some early product market fit, and they’re kind of just now starting to scale more significantly. What kind of parting advice or bits of advice might you give to that type of person? 

Lea Dudum 

Well, this is biased, but I would say hire a CFO if you haven’t already. 

Matt Widdoes 

Of course I’m sold. 

Lea Dudum 

Yeah, I think that it’s very exciting. So congratulations to anyone who’s raised that amount of money. It’s very hard to do and it’s a lot of money, but it does go fast. So I think the first thing you want to do is kind of get an understanding and security that you can hold on to that capital for at least 24 months. And that’s typically what investors want to see, right? They don’t want you raising within twelve months from now unless you’ve agreed to that with the board. But generally speaking, I would say. Build that plan. And that plan really means have a detailed financial model. Think through your priorities, which includes your growth strategies, either on the marketing side or the sales side, or a little bit of both, depending on how your company is growing. And then make sure you have the correct people in place to hit those goals. Because obviously, burn is a function of how much you spend and how much you make. So if you spent exactly what you thought you were going to spend, but you totally missed your revenue numbers, you’re still going to have a shorter runway. So I think my biggest advice is just get that plan in place, make everyone around you running towards that same strategy and model.